Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.

Wednesday, February 24, 2010

Sales of new homes plunged to a record low in January, government figures showed Wednesday, as the weak economy and a glut of foreclosed homes continue to weigh on the market.

The seasonally adjusted annual rate of new home sales plummeted 11.2% to 309,000 last month, compared with a revised rate of 348,000 in December, the Census Bureau said. That's a decline 6.1% from January 2009.

It was the lowest rate since the government began keeping records in 1963 and comes after declines in November and December.

The drop surprised many industry analysts. A consensus of economists surveyed by Briefing.com had expected January sales to rise to an annual rate of 354,000.

"Some people were expecting a surge in demand because of the tax credit," said Patrick Newport, an economist at IHS Global Insight. "But that surge isn't materializing."

Thursday, February 18, 2010

The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy.

"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!" ...

At the New York Stock Exchange, Wednesday morning's opening bell echoed across a silent floor as the few traders who arrived for work out of habit looked up blankly at the meaningless scrolling numbers on the flashing screens above.

Sources at the White House said President Obama was "still trying to get his head around all this" and was in seclusion with his coin collection, muttering "it's just metal, it's just metal" over and over again.

Some gold bugs use the excuse that "paper money only has value because people think it does" to argue for a return to the gold standard. However, they overlook the fact that the same applies to gold as well. Gold only has value because people think it does. As with paper money, its value is dependent on supply and demand.

Sure, if they choose to, governments can more easily produce more paper currency than they can produce more gold. On the other hand, to the extent that we store gold in military forts in Kentucky (and waste resources protecting it), we limit its supply for more useful purposes.

Personally, I expect four of the five to be issues this year. The exception is #4. The FHA is losing money hand over fist, but is unlikely to tighten lending because as a government institution it has little incentive to act rationally.

Also, the threat of item #2 is inversely related to the threat of item #5.

The official unemployment rate declined in January. It's still too early to tell for sure, but so far it looks like we're seeing the declining unemployment that occurs after a typical recession, rather than the "jobless recovery" of the previous two recessions. (The typical pattern after a recession is for the unemployment rate to decline. That pattern was broken by the previous two recessions when the unemployment rate rose for quite a while after the recession had ended.)

Payroll numbers suggest we lost 20,000 jobs in January. That's far better than the pace a year ago, but we need 100,000-200,000 job gains just to keep up with population growth. This graph shows the month-over-month change in payrolls as measured by the U.S. Bureau of Labor Statistics:

Here is the month-over-month change in payrolls as measured by Automatic Data Processing, a private payroll-processing company. I'm starting to favor the ADP data over the BLS data due to lower month-to-month volatility. As a reminder for conspiracy theorists, the ADP data does not come from the government.

Some economists consider aggregate weekly hours worked as the best measure of both unemployment and underemployment. For those of you who favor the U6 measure of the unemployment rate over the official rate because it takes underemployment into account, you should love the Aggregate Weekly Hours Index. Here we see that the pace of average weekly hours worked is showing continuing improvement, but it's still below zero:

Finally, some economists like to look at weekly initial unemployment claims because it is updated more frequently than the monthly statistics above. This graph shows the year-over-year percentage change. Notice it's currently below zero, which is a good sign.

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."

And:

What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

Again, there's a big difference between a strategic defaulter and someone in actual financial trouble. Because they have jobs, decent salaries, and personal savings, strategic defaulters are ideal targets for banks to go after in order to get their money back.

Wednesday, February 03, 2010

Walking away from an underwater mortgage is one way in which normal homeowners may be able to both help themselves and the economy.

The logic is straightforward. As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.

Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers' tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes.

Not only will people end up losing money when they sell their home, but many underwater homeowners are likely to pay far more on their mortgage and other ownership costs than they would to rent the same unit. We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage. ...

Not only would it benefit millions of homeowners to send the keys back to the bank, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. ...

Unfortunately, the current policy from the Obama administration goes in the opposite direction. Rather than realistically assessing what is best for homeowners, the policy seems intended to do everything possible to persuade people to keep sending checks to the banks, even using taxpayer dollars as an inducement. ...

Walking away from a home may well be the best economic choice, and in such cases, it is also likely to be the best choice from the standpoint of the economy as a whole. This may not be advancing God's work, but if millions of people walked away it might educate Goldman Sachs and the rest of Wall Street bankers about what happens when everyone plays by their rules.

Although I still disagree about the ethics, I'm starting to warm up to this type of argument.

That's right, with a glut of foreclosures plaguing the nation's neighborhoods, the FHA is temporarily removing restrictions on investors who buy and sell homes within 90 days.

It's just for one year, but Flippers are no longer persona non-grata with the government.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," FHA Commissioner David Stevens wrote in a statement last month. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

So the FHA wants to encourage flipping and turn first-time buyers, who are already getting a tax break, into new real estate speculators? Nope, they just want to get as many foreclosed properties as possible off the market. This opens up a whole new bundle of buyers to current real estate investors who previously couldn't flip the home to a low-income borrower.

Monday, February 01, 2010

Assuming Canada doesn't have a housing bubble, it would also invalidate Ben Bernanke's argument that the housing bubble was caused by a global savings glut. Of course, if the U.S. (and global) housing bubble was caused by a combination of factors, then low interest rates and high global savings could be necessary but not sufficient causes of the bubble.